Big Picture

European break-up plans, China ready to boost growth, US data mixed

With word of contingency plans being drawn up by politicians and officials, investor preparations for a Greek exit from the single-currency euro zone hung over global markets throughout the week.

Two meetings – one last weekend among G8 leaders and the other midweek among 27 EU countries – failed to yield any substantive solutions to the current impasse. Finance ministers from the 17-member euro zone are now grappling with plans to protect bond markets, the banking sector and financial markets in the event of a break-up of the currency bloc. The region’s banks, which are sitting on US$1.19 trillion of debt to Spain, Portugal, Italy and Ireland, may face a wave of losses if Greece abandons the euro. The fiscal crisis has wiped out US$4 trillion from global equity markets this month.

The week had gotten off to a good start after France and Germany said they would work together to keep Greece in the euro zone while talk of China taking steps to boost economic growth added to the early optimism. US housing data were also upbeat as sales of existing homes beat expectations – 3.4% in April versus an anticipated 2.7% gain. Less-than-enthusiastic durable goods orders released Thursday were then followed by near-flat jobless claims numbers continuing a pattern of inconsistency in US economic health. But as has happened throughout the past three years, euro zone fears quickly escalated and overshadowed other developments.

Markets

North American markets grind higher

The shortened holiday trading week started with the S&P/TSX index rising 171 pts. Tuesday, the benchmark’s biggest one-day gain in more than a month. The index held on to the gains through Thursday’s close ending the three-day period up from 11,280 pts. to 11,566. South of the border, it was a similar story with major indexes strongly advancing the first trading day of the week – Monday in this case – and then grinding higher in subsequent sessions. Over the four days, the Dow rose from 12,369 to 12,529, the S&P 500 rose from 1,295 to 1,320 and the NASDAQ moved higher from 2,778 to 2,839.

Our Recommendation

Market sell-off setting up a longer-term buying opportunity

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “this pullback is healthy for the market overall and after completing the current consolidation phase, is ultimately setting up a longer term buying opportunity.”

• Fixed income. Andrew Mystic, Associate Director, PAG, highlights the following recommendations: “Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – new call – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

• Portfolio strategy. Scotia Capital Portfolio Strategist Vincent Delisle says: “One of the main casualties of the ongoing sell-off has been commodities. We continue to expect weaker Chinese data through Q2, which should trigger broader easing, i.e., lending rate cut…TSX and Resource under-performance tend to bottom once lending rate cuts have started. We are getting closer.”

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